“Never Let A Good Crisis Go To Waste” – And Short AMZN

by Dave Kranzler, Investment Research Dynamics:

The “crisis” quote above originated with Winston Churchill. Several U.S. politicians have referenced it since then (most recently Rahm Emanuel when he was Obama’s Chief of Staff). I’m sure the Wall Street snake-oil salesmen and economic propagandists are more than happy to attribute the deteriorating economic numbers to the hurricanes that hit Houston and southwestern Florida.

Retail sales for August were released a week ago Friday and showed a 0.2% decline from July. This is even worse than that headline number implies because July’s nonsensical 0.6% increase was revised lower by 50% to 0.3% (and it’s still an over-estimate).

Before you attribute the drop in August retail sales to Hurricane Harvey, consider two things: 1) Wall St was looking for a 0.1% increase and that consensus estimate would have taken into account any affects on sales in the Houston area in late August; 2) Building materials and supplies should have increased from July as Houston and Florida residents purchased supplies to reinforce residences and businesses. As it turns out, building supplies and material sales declined from July to August, at least according to the Census Bureau’s assessment. Furthermore, online spending dropped 1.1%. Finally, the number vs. July was boosted by gasoline sales, which were said to have risen 2.5%. But this is a nominal number (not adjusted by inflation) and higher gasoline prices, i.e. inflation, caused by Harvey are the reason gasoline sales were 2.5% higher in August than July.

Too be sure, the retail sales overall were slightly affected by Harvey. But the back-to-school spending is said to have been unusually weak this year and AMZN’s Prime Day no doubt pulled some August online sales into July. However, back-to-school spending reflects the deteriorating financial condition of the middle class. I have no doubts in making the assertion that the factors listed in the previous paragraph which would have boosted sales in August because of Harvey offset significantly any drop in retail sales in the Houston area during the hurricane.

Note – John Williams published his analysis of retail sales and it agrees with my analysis above (Shadowstats.com): Net of Hurricane Harvey Effects – Headline Economic Numbers Still Were Miserable, Suggestive of Recession – Hurricane Impact on August Activity: Mixed, Probably Net-Neutral for Retail Sales – August Real [inflation-adjusted] Retail Sales Declined by 0.61% (-0.61%) in the Month, Plunged by 1.24% (-1.24%).

The Fed Continues To Target Stock Prices. The Dow and the SPX continue to hit new all-time highs every week. At this point there’s no explanation for this other than the fact that, according to the latest Fed data, the Fed’s balance sheet increased by $18 billion two weeks ago. This means that the Fed pushed $18 billion into the banking system, which translates into up $180 billion in total leverage (the reserve ratio on high-powered bank reserves is 10:1).

The good news – for Short Seller’s Journal subscribers – is that, despite this overt market intervention, a large portion of the stocks in the SPX are trading below their 200 dma:

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The chart above shows the percentage of stocks in the SPX trading above their 200 dma. In March nearly 80% of the stocks were above the 200 dma. By late August the number was down to 54%. Currently 60% are trading above the 200 dma, which means 40% are trading below.

It’s uglier for the entire stock market, as only 43.5% of the stocks in the NYSE are trading above their 200 dma, which means that 56.5% are trading below the 200 dma. This explains why neither the Nasdaq nor the Russell 2000 were able to close at new all-time highs.

Without the Fed’s direct support of the stock market, there’s no question in my mind that the stock market would be crashing. Perhaps more frightening is the increasing amount of debt being added throughout the U.S. financial system. The debt ceiling limit was suspended until December. The amount of Treasury debt outstanding jumped over $300 billion to over $20 trillion the day the ceiling was suspended. John Maynard Keynes’ macro economic model was one in which Governments could stimulate economic growth through debt-financed deficit spending. But once the economy was in growth mode, the Government was supposed to operate at a surplus and pay down the debt. Never did Keynes state that it was acceptable to incur deficit spending and debt to infinity, which is the current course of the U.S. Government.

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